Working capital does not sound very exciting and it is often associated with the purely technical debtors and creditors items. As working capital in almost every organization includes substantial hidden value in terms of cash it is essential to re-brand working capital in a way that your company is able to unlock this hidden cash and to allocate this to either an improved customer proposition, to (even more) engaged employees or to a higher return for investors.
But how do you re-brand working capital successfully? My experience is that an effective approach is to bring this topic more ‘down to earth’ and make a comparison with your own personal financial situation. You would probably be more keen to pay your bills as late as possible and achieve your outstanding claims as soon as possible, unless you earn an interesting discount.
One reason behind the assumed complexity of working capital relates to the accounting method. Working capital includes both ‘cash’ as well as ‘non-cash’ flows as it manages timing differences between your cost-and revenue bookings. Higher costs result in an improved working capital position and vice versa, however it does not impact your cash position.
I strongly support to breakdown the balance sheet movements into ‘cash’ and ‘non-cash’ items and to focus on the ‘cash items’ only. If you start the introduction of smarter e-billing systems or successfully sell old debtors the positive cash flow impact will immediately be visible and this will create the right spirit to continue focusing on discovering and unlocking hidden cash; which is in most organisation crucial to survive nowadays.